Tower signals

As rentals decline, valuations come into focus

June 2019
Analytical contacts
Hetal Gandhi
Director, CRISIL Research
hetal.gandhi@crisil.com

Rounak Agarw al
Senior Research Analyst, CRISIL Research
rounak.agarw al@crisil.com
The telecom towers industry in India is in the process of a structural overhaul. Change in the base transceiver station
(BTS) technology mix (2G/3G to 4G), consolidation in the industry, and gradual exit of smaller tower operators have
changed the landscape.

The Indus Towers-Bharti Infratel merger, expected to be completed by late 2019, is set to create the world’s second-
largest mobile tower operator, with over 163,000 towers and 36% tower market share in India. Post-merger, the
industry will have three large players controlling over 70% tower market share. The balance will be shared among
smaller towercos and telcos having captive towers.

Meanwhile, the telecom industry is also in the midst of structural changes. The consolidation wave has reduced the
number of players to about five as of 2019, from ~15 players in 2012. With telecom operators divesting in tower
assets, the towers industry is expected to the shift to pure-play independent towercos from the operator-led model.

Towercos hit hard by tenancy losses

Consolidation in the telecom industry has changed the dynamics of towercos. The latter reported massive tenancy
losses over the past one and half years. For instance, the recent merger of Vodafone and Idea has resulted in over
57,000 tenancy losses. Further reduction of ~21,000 tenancies is expected in the first half of fiscal 2020. While exit
penalties are expected to partially offset the revenue loss, the impact of tenancy losses is expected to spill over to
fiscal 2020 as well.

The telecom sector moving towards an oligopolistic structure, with three players accounting for more than 90% market
share, will pose challenges for towercos. This will put pressure on rent revenue per tower as the number of tenants
per tower would go down. Further, the stressed financial condition of debt-laden telecom incumbents will restrain any
material hike in rentals, at least over the medium term. In addition, through the towers added by Bharat Sanchar
Nigam Ltd and Reliance Jio account for a considerable share of captive towers, the revenue from these towers does
not flow to the industry.

A look at tower rentals in the past 12 quarters indicate a stabilising trend in till the first half of fiscal 2018 and then a
drop for the first time in five years in the second half of fiscal 2018 owing to tenanc y losses.

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Rentals declining amid structural changes (Rs ’000)
84

82

80

78

76

74

72
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
FY17 FY17 FY17 FY17 FY18 FY18 FY18 FY18 FY19 FY19 FY19 FY19

Note: Includes financials of Bharti Infratel (consolidated)

Source: Company reports, CRISIL Research

Our industry interactions suggest that telcos are currently focusing on densification of 4G networks. The replacement
of 2G and 3G BTSs with 4G ones will slow down net BTS additions to ~1.55 lakh in fiscal 2020, against ~2.75 lakh
in fiscal 2019. The number of BTSs per tower is, however, expected to increase marginally to ~3.85 this fiscal,
compared with ~3.67 in fiscal 2019, on increased loading by telcos to increase their capacity per site and support
existing coverage during high traffic and congestion. This loading results in a discount to telcos (need to pay just 10-
15% of rent), which reduces the potential for higher topline of towercos.

Going forward, loaded sites are expected to account for a higher proportion of incremental tenancies. In addition,
rentals might come under pressure during contract renewals as telcos have higher bargaining power. This is because
telcos’ return on capital employed (RoCE) is less than ~2%, compared with towercos’ RoCE, which is as high as 19-
20%. Post a decline of ~7% in fiscal 2019, CRISIL Research expects the rent revenue per tower to remain under
pressure and decline by another 2-3% in fiscal 2020.

2
Rentals to continue declining in FY20 (Rs ’000)

800 7% 7% 8%
7%
6%
700 5% 6%

600 3% 4%

500 652 2%

400 0%
715 -2%
630 668 665
300 601 -2%
548 563
200 -4%
-7%
100 -6%

0 -8%
FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20P

Rental per tower Growth rate (RHS)

E: Estimated; P: Projected
Source: CRISIL Research

Telcos betting to correct debt profile with asset sales, however valuations
remain critical
Telecom sector debt remains elevated due to high network investments and spectrum price. CRISIL Research
estimates the total debt to be ~Rs 4.3 trillion as of March 2019. Meanwhile, the continued deterioration in price
realisation has led to weak cash accrual. Thus, telcos are resorting to measures such as selling standalone towers
or reducing stake in existing tower subsidiaries, to pare debt.

For instance, Vodafone and Idea, last year, sold ~20,000 standalone towers to American Tower Company (ATC) at
~Rs 78 billion. Bharti Airtel has raised over ~Rs 120 billion through multiple rounds of stake sale in Bharti Infratel.
Recently, ATC has acquired ~13% residual stake of Tata Teleservices in ATC Telecom Infrastructure at ~Rs 25
billion.

Bharti Airtel and Vodafone Group both are in talks to slash their stakes in the Bharti Infratel and Indus Towers merged
entity. Post-merger, Vodafone Idea has an option to sell its 11.15% stake in Indus, which has an implied value of
~Rs.62 billion for cash at completion.

The sale of assets coupled with the recent rights issue of ~Rs 500 billion by various players is likely to reduce the
debt of telcos in fiscal 2020, but valuations of tower assets will remain a key monitorable.

3
Tower valuations declined in tandem with rentals; future valuations a key
monitorable
The valuation of tower portfolios depends on factors such as geographical presence, clientele, and master service
agreements. ATC has been acquiring the tower portfolios of small players in India. ATC’s Viom acquisition in 2015
made it a leading independent telecom infrastructure provider and helped it to compete with other big players such
as Bharti Infratel and Indus Towers and acquire ~16% of tower market share as of fiscal 2019 from ~2% as of fiscal
2012.

The valuation of telecom towers is based on defined cash flows to towercos backed by long-term contracts with
telcos. Typically, large telcos have 8-10 years of contract period with towercos.

Between 2015 and 2017, tower rentals grew at 5-7% on-year, with tower valuations rising in tandem. However, the
decline in rentals in 2018 seems to have impacted the valuation of towers, as is evident from the chart below. CRISIL
Research believes the valuations to stay subdued in the near term, as rentals are unlikely to go up. Besides,
increased investment in newer technologies like small cells, in-building solutions, massive multiple-input and multiple-
output or MIMO and Wi-Fi hotspots might also keep tower valuations under check.

Decline in rentals impacted tower valuation in 2018 (Rs mn)

7 6.6

5 4.7

3.9
4

3
2.1
2

0
2015 2016 2017 2018
Note: The bars represent valuation per tower
Source: Industry, CRISIL Research

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